Speculation about a bidding war for Hollywood Entertainment, which owns the Hollywood Video chain, drove its shares well above Movie Gallery’s offered price.

The planned combination announced yesterday of the No. 2 and No. 3 video-rental chains would create a company with annual revenue of about $2.5 billion and approximately 4,500 stores. That would be a distant second to No. 1 Blockbuster, which has 9,000 outlets worldwide.

Hollywood, based in Wilsonville, Ore., has been looking for a buyer for several months and had attracted bids from Movie Gallery, Blockbuster and a management group.

Late last month, Blockbuster said it would launch a hostile bid for Hollywood in January if the rival’s directors failed to negotiate a deal. Blockbuster had last offered $11.50 a share for Hollywood.

Under the deal announced yesterday, Movie Gallery of Dothan, Ala., would offer $13.25 a share, or about $850 million, in cash for Hollywood’s shares. It would also assume about $350 million in Hollywood’s debt in the deal. The offer represents a 1.5 percent premium over Hollywood’s closing price of $13.05 Friday. The stock climbed 81 cents, or 6.2 percent, to close at $13.86 yesterday, however, as investors wagered it would attract a higher bid.

“This is not the last we’ll be hearing from Blockbuster,” predicted Arvind Bhatia, an analyst with Southwest Securities in Dallas.

Marla Backer, an analyst with New York-based Research Associates-Soleil, said Blockbuster will have to significantly sweeten its offer to remain competitive.

Yet Antioco discounted speculation that the movie-rental giant would be willing to pay substantially more: “We remain very much interested in it, but we’re not going to pay more than we believe the company is worth.”

Hollywood officials said the merger with Movie Gallery offered shareholders a better deal because uniting the two smaller companies would face less of a challenge from regulators.

In 1999, a plan to rename Hollywood Video stores under the Blockbuster banner was stopped by the Federal Trade Commission.

“It has significantly less regulatory risk than a deal with Blockbuster,” said Daniel Burch, a Hollywood spokesman.

But analysts said that in a Republican administration, even a merger with the nation’s top video-rental chain likely would sail through.